Total CP dropped another $48bn to $1.869 TN, raising the six-week decline
to $354.4bn. Asset-backed CP dropped another $15.9bn (6-wk drop of
$244.5bn) to $928.9bn. Year-to-date, total CP is now down $105.2bn,
with ABCP declining $155bn. Over the past year, Total CP is now down
$13bn, or 0.7%.

The dollar index sank 1.3% to 78.60. On the upside, the New Zealand dollar
increased 5.3%, the Australian dollar 4.0%, the Brazilian real 2.8%, the South
African rand 3.1%, the Canadian dollar 2.7%, and the Swedish krona 2.7%. On
the downside, the Japanese yen declined 0.3%. The Euro gained 1.6% to a record
high.

Commodities Watch:

For the week, Gold jumped 3.4% to $731.5 and Silver 7.2% to $13.62. December
Copper rose 5.9%. November crude ended the week at a record $81.62, up $3.53
on the week. October gasoline gained 3.5%, while October Natural Gas declined
3.2%. December Wheat was little changed. For the week, the CRB index surged
3.8% (up 8.4% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped
3.5% (up 25.5% y-t-d).

Japan Watch:

September 18 - Bloomberg (Toru Fujioka): "Japanese households' assets rose
to a record in the three months ended June 30, as individuals earned higher
returns on stocks, mutual funds and bonds. The value of households' assets
rose 2.9% to 1,555 trillion yen ($13.5 trillion) from a year earlier, the Bank
of Japan said..."

September 19 - Bloomberg (Kathleen Chu): "Land prices in Japan's three largest
metropolitan areas rose for a second-straight year, and nationwide commercial
land prices rose for the first time in 16 years as the country's property market
continued its rebound. The value of property in the Tokyo, Osaka and Nagoya
regions gained 5.1% on average for the year ended June 30..."

China Watch:

September 19 - Market News International: "China's retail sales are expected
to rise 15% to 8.8 trln yuan in 2007, the Ministry of Commerce's department
of market regulation said... In the first eight months, retail sales were up
15.7%..."

India Watch:

September 21 - Bloomberg (Cherian Thomas): "India may cut cash held by lenders
for the fourth time this year as currency sales by the central bank aimed at
curbing rupee gains flood the economy with excess money, Credit Suisse AG and
Nomura Securities Co. said. India's currency has strengthened beyond 40 per
dollar for the first time in nine years amid unprecedented overseas investment
in local shares. The central bank has injected rupees worth $43.1 billion in
the nine months to July, almost three times the amount in previous nine months."

Asia Watch:

September 21 - Bloomberg (Perris Lee): "Taiwan's export orders grew at a slower
pace in August as a housing recession eroded demand from the U.S., the island's
second-biggest overseas market. Orders for shipment overseas rose 16.32% from
a year earlier, slowing from July's 23.49% gain..."

September 18 - Bloomberg (David M. Levitt and Bryan Keogh): "The world economy
'is probably at its scariest point since the Depression' as fallout from the
U.S. subprime mortgage crisis crimps access to credit, said Ethan Penner, a
pioneer of the $600 billion commercial mortgage-backed securities market in
the early 1990s. 'We're probably at the closest point to a big meltdown, a
depression-type meltdown than we have been in our lives,' said Penner...now
a principal at real estate fund management firm Lubert-Adler Partners LP...
The U.S. housing market is an 'unmitigated disaster'... As foreclosures rise,
lenders will try to sell the properties they acquire at depressed prices, dragging
the market down further, he said."

September 19 - The Wall Street Journal Europe: "U.K. housing boom has been
a long time coming, but it has finally arrived. The 3% August drop in the average
house price, as reported by property Web site Rightmove, certifies the beginning
of the new era. The end comes when prices are too high by any measure... The
Bank of England tried to prick the bubble with rhetoric and higher interest
rates. But its tactics proved much less potent than the credit crunch."

September 19 - Bloomberg (Fergal O'Brien): "Europe's manufacturing and service
industries grew at the slowest pace in two years this month after paralysis
in the credit markets hurt banks, adding to evidence economic growth is waning."

Latin America Watch:

September 19 - Dow Jones (Anthony Harrup): "First it was tortillas, then milk,
and now Mexican bread prices are going up, corroborating the central bank's
persistent warnings about food prices threatening its inflation outlook. Mexico's
baking industry confirmed this week that it plans to raise bread prices by
15% to 17% on average to recoup rising costs of wheat flour and other raw materials.
Antonio Arias Ordonez, president of the Mexican Bakeries Industry Chamber,
said he expects all of the country's roughly 26,500 bread shops to raise their
prices. 'It would be unusual if they didn't after raw materials costs have
risen between 55% and 65%' Arias said... Apart from flour, prices of margarine,
eggs and sugar, have also been rising, he added."

Bubble Economy Watch:

September 18 - Bloomberg (Carlyn Kolker): "U.S. companies increased total
compensation for their chief in-house lawyers by 14% in 2007, according to
a survey by legal consultant Altman Weil Inc., which cited competition for
legal talent... Median total pay for chief legal officers was $457,000, according
to the survey... Salaries rose 5.8% to $300,000, and bonuses were up 43% to
$157,000. 'This may reflect a need to counter the dramatic increases in law
firm starting salaries as general counsel compete with law firms for talent,'
Altman Weil consultant James Wilber said... Several New York-based law firms
raised pay for first-year attorneys to $160,000 this year."

Central Banker Watch:

September 18 - Bloomberg (Bob Willis and Tom Keene): "Conrad DeQuadros, senior
economist at Bear Stearns & Co. in New York, comments on the Federal Reserve's
decision yesterday to cut its benchmark interest rate to 4.75% from 5.25%.
In a note to clients, he and Bear Stearns chief U.S. economist John Ryding
called yesterday a 'black day' for the Fed. Dequadros spoke in an interview...
On the language in his note: 'It is strong language. For the Fed to cut rates
aggressively while citing that inflation risks remain, that risks the Fed's
inflation fighting credibility... There are also issues of credibility about
Fed communications in that there was no signal from Fed officials that such
a move was coming... The direction we seem to be on in terms of adding liquidity
to a financial system that already has plenty of liquidity risks putting us
in a scenario in which the Fed might have to constrain monetary expansion very
drastically at some point down the road."

September 19 - The Wall Street Journal (Greg Ip ): "Federal Reserve Chairman
Ben Bernanke moved aggressively to stop the spreading credit crunch from sinking
the nation's economy with a surprising half-percentage-point cut in interest
rates, casting aside for now worries about appearing to bail out investors.
The cut, which exceeded the quarter-point reduction most economists had expected,
signals that Mr. Bernanke, fearing broad damage from the market turmoil that
erupted a month ago, preferred to risk doing too much rather than too little.
The move came amid a sizable drop in home sales, construction and prices that
could send mortgage defaults higher and damp consumer spending. With yesterday's
move, Mr. Bernanke may have shown himself closer in style and tactics to predecessor
Alan Greenspan than some market watchers had suspected. That carries risks:
Critics may start referring to the 'Bernanke put,' as they once spoke of the
'Greenspan put' under the former Fed chairman..."

September 18 - Bloomberg (Christian Vits): "European Central Bank council
member Axel Weber said he expects stronger economic growth and rising oil prices
to stoke inflation. 'We have to expect somewhat higher inflation rates for
the rest of the year,' Weber, who also heads Germany's Bundesbank, said..."

September 1- Market News International (Steven K. Beckner): "There are many
interesting aspects of former Federal Reserve Chairman Alan Greenspan's just-released
book, but perhaps the most important are his warnings about inflation...from
a Fed watchers' standpoint, Greenspan's premonitions about inflation and long-term
interest rates are the most timely... Greenspan ascribes much of the Fed's
ability to get inflation under control in recent years to globalization. 'The
continuing acceleration of the flow of workers to competitive markets during
the past decade has been a potent disinflationary force...' This disinflation
has in turn helped hold down long-term interest rates... But he writes that
'the rate of flow of workers to competitive labor markets will eventually slow,
and as a result, disinflationary pressures should start to lift. China's wage-rate
growth should mount, as should its rate of inflation.' Chinese export prices...will
rise further, he predicts. The result will be 'a pickup of price inflation
and wage growth in the United States', writes Greenspan, adding, 'the burden
of managing this shift will fall on the Federal Reserve.' 'How significant
-- and how corrosive - these price pressures will become for the American economy
will depend in large part on the Fed's ability to respond' he writes, adding,
'The degree of monetary restraint required to contain any given rate of inflation
will increase'"

September 19 - Bloomberg (Pimm Fox and Kevin Carmichael): "Paul O'Neill, a
former U.S. Treasury secretary and now a special adviser to Blackstone Group
LP, comments on the Federal Reserve's decision yesterday to lower interest
rates... 'The markets were very fearful of the liquidity crunch. Markets basically
stopped trading. They were reassured by the chairman's action yesterday. One
might say Ben put the punch back in the punchbowl. There was nothing in the
punchbowl. He succeeded in reassuring the markets that the Fed was not going
to let this linger on. I think that's what we needed.'"

California Watch:

September 21 - Bloomberg (William Selway): "A majority of Californians expect
the economy to worsen in the most populous U.S. state over the next year as
housing sales plunge and more residents lose their homes to foreclosure, the
results of a poll released today show. Fifty-nine percent of adults expect
'bad times' financially over the next 12 months, a jump of 10 percentage points
since June..."

GSE Watch:

September 18 - Bloomberg (James Tyson): "Federal Reserve Chairman Ben S. Bernanke
opposed a push to allow Fannie Mae and Freddie Mac to buy mortgages higher
than $417,000, saying it may undermine efforts to strengthen regulation of
the two largest U.S. mortgage finance companies. A proposal in Congress to
increase the limit 'would be ill-advised if it has the practical effect of
reducing the incentives to achieve meaningful' regulatory tightening over the
companies, Bernanke said... [Representative] Frank and other Democrats, seeking
to reverse the biggest housing market slump in 16 years, have called on the
Bush administration to allow Fannie Mae and Freddie Mac to buy bigger mortgages
and expand their $1.5 trillion investment portfolios. The companies' regulator
announced today it will allow the companies to annually increase their purchases
of home loans and mortgage bonds by 2%. Bernanke in the letter written two
days ago said... 'Both the size and composition of the portfolios should be
tied to reforms that both reduce the systemic risks posed by the portfolios
and also clarify the public purpose,' Bernanke said..."

Mortgage Finance Bust Watch:

September 18 - Marketwatch (Robert Schroeder): "Reaching out to hard-hit borrowers
in the subprime-mortgage market, the House...passed a bill that lowers down
payments for borrowers, raises loan limits and boosts funds for housing counseling.
Passed by a vote of 348 to 72, the bill reforms the Federal Housing Administration
and is the latest lifeline thrown to borrowers from Washington... About two
million loans are expected to reset to higher rates in the next two years,
with defaults expected to follow... The bill directs up to $300 million a year
into an affordable housing fund. A motion offered by Rep. Jeb Hensarling, R-Texas,
to kill the fund was rejected... Lawmakers also passed an amendment to the
bill offered by [Representative] Frank that would raise the agency's loan limit
from its current $417,000 to as much as $729,750. 'Such an increase would ensure
that FHA is a viable option for borrowers who have payment option and interest-only
adjustable rate mortgages (ARMs), which will be resetting in the next few years," said
Stanford Group Company analyst Jaret Seiberg."

Foreclosure Watch:

September 18 - Associated Press (Alex Veiga): "The number of foreclosure filings
reported in the U.S. last month more than doubled versus August 2006 and jumped
36% from July, a trend that signals many homeowners are increasingly unable
to make timely payments on their mortgages or sell their homes amid a national
housing slump. A total of 243,947 foreclosure filings were reported in August,
up 115% from 113,300 in the same month a year ago...RealtyTrac Inc. said...
'The jump in foreclosure filings this month might be the beginning of the next
wave of increased foreclosure activity, as a large number of subprime adjustable
rate loans are beginning to reset now,' RealtyTrac Chief Executive James J.
Saccacio said... The latest figures also reflect an increase in the number
of homes going into foreclosure that are not being picked up in estate sales
and are ending up going back to lenders. The number of bank repossessions jumped
to 42,789 in August, compared with 20,116 a year earlier, the RealtyTrac said.
In July, there were 26,842 bank repossessions. Nevada, California and Florida
had the highest foreclosure rates in the country last month, the firm said...
California's foreclosure rate was one filing for every 224 households. The
state reported the most foreclosure filings of any single state with 57,875,
up 48% from July and an increase of more than 300% from August 2006."

September 19 - Bloomberg (Bob Ivry): "As many as half of the 450,000 subprime
borrowers whose mortgage payments increase in the next three months may lose
their homes because they can't sell, refinance or qualify for help from the
U.S. government. 'Short of the cavalry riding in over the hill, a lot of these
people are just stuck,' said Christopher Cagan, director of research and analytics
at...First American CoreLogic... The number of borrowers whose mortgage payments
jump in the next three months will be the second-highest ever for a quarter,
according to Credit Suisse... Twenty-seven percent have already missed a payment,
said First American LoanPerformance, which owns the largest database of U.S.
mortgages. That makes them ineligible for the Federal Housing Administration
bailout proposed last month by President George W. Bush."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

September 18 - Bloomberg (Jody Shenn): "Securities backed by prime U.S. jumbo
mortgages may be riskier than investors think because almost half of the underlying
loans are from California, where home prices may again collapse, according
to Barclays PLC. California accounts for 45% of jumbo mortgages in securities
sold last year, up from 35% in 1989, Barclays mortgage-bond analysts wrote...
Following a housing boom, home prices in California declined by 12.5% between
1991 and 1995. Losses after foreclosures on jumbo loans securitized in 1989
rose to 3%, which would be enough to cause many current investment-grade bonds
to default. 'The current housing environment in California appears similar
to the 1990s,' wrote the...analysts led by Ajay Rajadhyaksha. 'Many investors
believe that jumbo credit is sound. We think that this sense of security is
misplaced.'"

Real Estate Bubbles Watch:

September 18 - Bloomberg (Dan Levy): "San Franciscans soon may have to crane
their necks back a bit farther to gaze up at the city's tallest buildings.
City officials are pushing for construction of two office and residential towers
of 1,200 feet or more - at least 80 stories. They would dwarf the Transamerica
Pyramid, which at 853 feet has been the tallest building in San Francisco since
1972. The new structures would challenge the 1,250-foot height of the Empire
State Building in New York, the second-tallest U.S. building. It's 'imperative'
for San Francisco to keep pace as super-tall towers spring up around the globe,
Mayor Gavin Newsom said... 'Tall buildings are symbols of cities that don't
want to be left behind in a competitive world,' architect Daniel Libeskind,
who worked on designs for towers to replace Manhattan's World Trade Center,
said..."

September 17 - Bloomberg (Peter Woodifield): "Construction of the London office
tower dubbed 'the Shard' may be delayed because of an increase in borrowing
costs, according to the developer of the building that would be the U.K.'s
tallest. Talks about financing the project 'have, unfortunately, been affected
by the recent adverse credit markets,' said Sten Mortstedt, chairman of CLS
Holdings Plc... Work on the 72-story building, which will cost about 400 million
pounds ($799 million), is due to start later this year."

Speculator Watch:

September 18 - Bloomberg (Jesse Westbrook and Jenny Strasburg): "The U.S.
Securities and Exchange Commission is examining hedge funds for signs of insider
trading, demanding information about relationships between managers, employees,
family members and public companies. SEC officials told hedge funds to list
clients and workers who serve as officers or directors of publicly traded companies,
along with the names of any relatives who hold such posts, according to a 27-page
letter to industry executives... The SEC confirmed its authenticity."

Q2 2007 Flow of Funds:

Considering third-quarter financial market developments, it is tempting to
view Q2 Credit analysis as somewhat less than timely and relevant. Yet the
data do provide evidence of worsening unstable dynamics - in particular, an
energized Financial Sphere expanding at breakneck speed, easily outdistancing
the flagging Economic Sphere. Highlights for the quarter included double-digit
growth rates for both Commercial Bank and Broker/Dealer balance sheets. The
ABS market continued its streak of double-digit growth, and Agency MBS posted
back-to-back quarters of double-digit expansion. The Money Market Complex expanded
at an almost 17% rate. Rest of World (ROW) holdings of U.S. Assets expanded
double-digit rates as well.

Overall, Total Net Borrowing in the Credit Markets increased at a SAAR (seasonally-adjusted
and annualized rate) $3.757 TN during Q2 to $46.573 TN. This was down only
slightly from Q1's SAAR $3.784 TN, and, for perspective, compares to 2006's
growth of $3.825 TN, 2005's $3.380 TN, 2004's $3.085 TN, 2003's $2.767 TN,
and 2002's $2.365 TN. Notably, Corporate borrowings expanded at a 10.7% rate
during the quarter, State & Local governments 11.9%, and the Financial
Sector 9.8%. Financial sector borrowings built on Q1's brisk pace (9.7%) to
the strongest rate of expansion in a year. And while recent Credit market turmoil
has imposed borrowing restraint, it is worth noting that first-half corporate
debt growth was at the fastest pace since 1999.

Wall Street "structured finance" enjoyed a booming and, perhaps, foretelling
Q2. GSE Assets expanded SAAR $176bn (to $2.923TN), the strongest growth in
a year. Still, GSE assets were up only 1.1% y-o-y. Agency MBS surged SAAR $544bn,
up from Q1's $499bn and the year earlier $300bn. Agency MBS expanded at a 12.3%
rate during the quarter, with one-year gains of 10.8%. Asset-Backed Securities
expanded SAAR $545bn (to $4.295 TN), down only modestly from Q1's $574bn. And
despite the slowest quarter in some time, the ABS market still enjoyed a 13.3%
growth rate for the quarter and 18.1% growth over the past year. The ABS market
has expanded 63% during the past 10 quarters, extraordinary growth that hit
the wall with a thud with the homecoming of market tumult in Q3.

Interestingly, Total Mortgage Debt (TMD) expanded SAAR $1.167 TN (to $13.982
TN), up from Q1's SAAR $1.087 TN. TMD actually expanded at a robust 9.0% rate,
the largest expansion since Q3 2006 - suggesting that ultra-easy Credit Conditions
endured outside of subprime. Even Home Mortgage debt growth accelerated, rising
to a 7.7% rate from Q1's 7.3%. Meanwhile, the Commercial Mortgage lending boom
went to "blow-off" extremes - expanding at a 15.6% pace (vs. Q1's 10.1%). For
the quarter, Home Mortgage lending expanded SAAR $756bn to $10.750 TN and Commercial
Mortgage a record SAAR $344bn to $2.344 TN. Total Mortgage debt has expanded
9.2% over the past year and 24% over two years, with Commercial mortgage debt
up 13.9% y-o-y and 31%. It will be fascinating to learn how dramatically mortgage
debt growth slowed during Q3. Credit restraint hit all sectors.

Quite possibly, Q3 will see record banking sector asset growth, both building
on Q2 momentum and taking up the slack created by the Breakdown of Wall Street
Risk Intermediation. During the second quarter, Commercial Banking Assets expanded
SAAR $1.037 TN to $10.455 TN. For comparison, Bank Assets grew $897bn during
2006, $763bn in 2005, $762bn in 2004, $495bn in 2003 and $477bn in 2002. On
a percentage basis, Q2 experienced Bank Asset growth of 10.5%, with Loans up
8.9%. Over the past year, Bank Loans have expanded 9.0%, with a two-year gain
of 22.9%. Bank holdings of Mortgage loans expanded at a 9.9% rate during the
quarter (to $3.462TN), with one-year growth of 10.5%. Corporate Bond holdings
jumped $44.4bn (22.1% annualized) to $848bn, with one-year growth of 15.5%.
It's an inopportune time in the Credit Cycle for the banking system to expand
so aggressively.

There were some interesting happenings on the Bank Liability side - the new
Credit instruments created in the process of financing robust asset growth.
Total Deposit growth slowed markedly to a 3.3% rate during the quarter to $6.162
TN (up 7.6% y-o-y). "Fed Funds & Net Repo" Liabilities expanded at a 14.3%
pace to $1.327 TN (up 11.7% y-o-y). Credit Market Liabilities expanded at a
brisk 18.5% rate to $1.063 TN (up 19.4% y-o-y). Miscellaneous Bank Liabilities
grew at a 36.3% pace to $1.942 TN (up 10.5% y-o-y), and Bond Liabilities increased
at a 22.9% rate to $625bn (up 18.3% y-o-y). One can make a strong argument
that it has not been the ideal environment to aggressively expand capital markets
liabilities to fund risky loan growth.

"Open Market Paper" expanded a record SAAR $410bn during Q2 to $2.110 TN.
This was a notable 22.4% rate of expansion during the quarter, with one-year
growth of 16.7%. Virtually all Q2 growth was in Commercial Paper, although
this amount and more will be reversed during the current quarter. The ABS sector
issued a record SAAR $295bn of (asset-backed) Commercial Paper during the quarter
(to $885bn). At SAAR $140.7bn, "Funding Corps" were the largest purchasers
of Open Market Paper. Funding Corp Asset growth slowed during Q2 (to 7.1% ann.),
reducing its first-half growth rate to 20.7% (to $1.681 TN). Fed Funds & Net
Repo Asset growth also slowed (to an 8.2% rate), reducing the pace of first-half
growth to a still blistering 19.0% (to $2.731TN)

Delving briefly into other financial operators, Life Insurance Cos. expanded
Assets at a 10.2% rate during the quarter to $4.868 TN (up 8.7% y-o-y); Financial
Companies at a 0.7% rate to $1.896 TN (up 2.1% y-o-y); Saving Institutions
at a 1.3% rate to $1.673 TN (down 5.4% y-o-y); Credit Unions up at a 3.9% rate
to $749bn (up 6.4% y-o-y); and REIT assets down at a 7.1% rate to $391bn (up
7.6% y-o-y).

Over the past year, Financial Asset holdings have increased $3.980 TN, or
9.9%, and Real Estate Assets $1.135 TN, or 5.1%. Total Household Assets have
ballooned $5.271 TN, or 7.9%, in four quarters. With Liabilities up $1.076
TN, or 8.5%, Household Net Worth has inflated $4.195 TN over the past year,
or 7.8%. Household Net Worth is up $8.512 TN, or 17.2%, in two years, certainly
supporting consumer confidence and expenditures.

Over the past year, ROW holdings of U.S. Assets were up an unfathomable $2.659
TN, or 20.9% (ROW Liabilities up $1.172 TN to $6.877 TN). Credit Market holdings
have increased $919bn, or 15.2%. Elsewhere, Security Repos increased $265bn
(28.2%) y-o-y, and Direct Investment rose $226bn (11.5%). Corporate Bonds (that
include ABS) increased $787bn, while "Other" Assets were up almost $400bn and
Deposits $118bn.

Second quarter numbers suggests the scope of global dollar "recycling" requirements
has inflated substantially. The Federal Reserve's aggressive rate cuts earlier
this week definitely only exacerbate what is becoming an untenable outward
flow of dollar liquidity from the U.S. financial system to the Rest of World
(that must, at a price, be "recycled" back into U.S. assets).

We believe the current course of Fed policy is an attempt to Sustain the Unsustainable.
The Q2 Flow of Funds report certainly confirms the enormity of ongoing Credit
creation, intensive Risk Intermediation, and Financial Sector Ballooning -
Classic Credit Bubble Dynamics. The bottom line is that only extreme levels
of Credit expansion and intermediation now sustain bloated and maladjusted
financial, economic and asset market structures. As we've witnessed, any interruption
in the Credit creation process will almost immediately instigate financial
dislocation. The Fed has chosen aggressive action in hopes of resuscitating
Credit excess and Bubble Perpetuation. A less risky strategy for our system
and currency would necessitate air flowing the other direction - out of Credit,
asset and economic Bubbles. Postponing the adjustment process at this point
ensures greater future financial tumult and economic hardship.